Canada: New Tax Changes Following Federal Budget 2016

At the end of March, the Canadian government announced the 2016 Budget, which contains a number of significant developments that would result in changes to the Income Tax Act and the Excise Tax Act.

Here are some key changes relevant to businesses:

Small Business Taxation - The Government will put the brakes on the gradual reduction in small business tax rates and keep the rate at the current 10.5%  (previously it was proposed that the rate would be reduced progressively to 9% for tax years 2018 onwards). The current gross-up factor and dividend tax credit applicable to non-eligible dividends will also remain unchanged (rather than be progressively reduced as previously planned).    

Implementation of BEPS (Base Erosion and Profit Sharing) - Following the OECD recommendations relating to how multinationals (MNC’s) recognize and report their international revenue, the Canadian government, which to date has been quiet on the issue, announced that it would be introducing new legislation to require country-by-country reporting, a refocusing on arm’s length principles for transfer pricing so it reflects the revised OECD interpretation of the principle, and increased reciprocity and information sharing with other international revenue authorities.

As per the OECD guidelines, the additional country-by-country reporting obligations will apply to  MNC’s with total annualized consolidated revenue of €750 million or more. MNC’s with an ultimate parent company that is located in Canada will have a reporting obligation to the Canadian Revenue Authority.